| Interest Rate is one of the most important financial variables, it has effect on issues such as asset pricing, the demand and supply of money, at the same time Interest Rate also have a heavy influence on macro-economy variables including exchange rate. Our country’s economic reform program can not succeed if market-based reform of interest rate have not been carried out. Even today, the interest rate market is still primitive and the pace of reform is still slow. Those problems which are induced by the regulated Interest Rate including inefficient resource allocation and shadow bank may trigger systematic financial risk. The market-based reform of interest rate should be the all-important problem because many other reforms can not be carried out before interest rate reform. With the development of globalization and liberalization, the facts which have an effect on the change of the Interest Rate have become more complex. HIM model may be the most popular model among various Interest Rate models because its special advantages. The key to these techniques is the recognition that the drifts of the no-arbitrage evolution of certain variables can be expressed as functions of their volatilities and the correlations among themselves. In other words, no drift estimation is needed. This paper will include the HJM model with jump process and use this generalized HJM model at defaultable bonds modeling and exchange rate modeling. All these will give a word about the importance of the volatility of the Interest Rate.This paper have five sections. The first section will talk about the development of the Interest Rate market and Its reform. The second section is the Preliminaries of Interest Rate modeling. The Third section will introduce the traditional HJM model and the one will jump process. The fourth section apply the HJM model in the defaultable bond and exchange rate modeling and the last section is a summary. |
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